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Clear Channel Changing Its Tune

Clear Channel Communications (NYSE: CCU) is formulating a business plan that will allow listeners to buy and download tunes from their favorite radio stations. With the popularity of downloading music and the increased interest in satellite radio, broadcasters have little choice but to adapt.

Traditional-radio broadcasters are facing a slowdown in advertising sales as their listening audience declines. Instead of tuning in to FM radio stations, music fans can listen to their favorite tunes on digital music players such as Apple's (Nasdaq: AAPL) iPod, and more are switching to the commercial-free satellite radio services, XM Satellite Radio (Nasdaq: XMSR) and Sirius (Nasdaq: SIRI) , that broadcast in high fidelity.

To counter this new listening revolution, Clear Channel has employed iBiquity Digital to convert most of its 1,200 radio stations to digital high-definition (HD) radio, a new format. The privately held technology company, which designs transmission and receiver equipment, is co-owned by several top radio broadcasters, including Clear Channel, Disney (NYSE: DIS) , and Viacom (NYSE: VIA) .

The new technology, according to Clear Channel, will not only allow terrestrial radio broadcasters to deliver CD-quality radio but also offer new products such as subscription-based services to complement the company's reliance on advertising sales. By the end of 2007, digital HD radio will serve an estimated 90% of the U.S. population.

Sounds good, right? Ah, but here are a couple of wrinkles. First, to receive the new HD radio broadcasts, consumers will have to buy a pricey HD-capable receiver, in the same way that HDTV viewers had to shell out big bucks for new equipment. Matsushita Electric (NYSE: MC) , better known by the name Panasonic, already has HD radios on the market that cost a hefty $1,000. But unlike with satellite radio, there's no subscription fee for HD radio. The question is whether listeners will pay for the new equipment when other types of music players are substantially cheaper.

Secondly, selling music downloads is a slim-margin business. For example, of the $0.99 Apple charges for a song, the company pays $0.65 to $0.80 in wholesale costs to the music labels. Subtract credit card transaction fees and site maintenance costs, and the resulting profit becomes razor-thin. What drove Apple's record-breaking quarters last year wasn't the sale of the songs but the 20% profit margins on sales of the iPod. That's a popular piece of hardware the broadcasters don't currently have.

Clear Channel is betting that HD radio will give consumers what they're looking for. If listeners decide it's worth the money to buy the HD equipment to get feature-rich services such as downloading or recording, then traditional radio can keep its consumers tuned in. For investors in Clear Channel, that would be music to their ears.

For more on the developing battle between terrestrial and satellite radio, check out:

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